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The Aftermath

THE AFTERMATH

 

 

CLIENT TALKING POINTS

 

THE AFTERMATH

Last night’s debate touched on myriad topics ranging from the economy to the fiscal cliff to job creation. This morning, polls show that Mitt Romney was the clear “winner” of the debate. For anyone who missed it, Mitt was aggressive, well-spoken and was not afraid to offer a retort to accusations from the President. Considering that Obama hasn’t really had to truly face off against anyone in almost four years, it makes sense that he was a little rusty. 

 

This is exactly what Mitt Romney needs to do in order to win the election in November. He must continue to be aggressive and offer solutions to the American people that will fix the economy. If Mitt wins, things across all markets will change provided he keeps his promise of firing Ben Bernanke.

 

 

MANIC MEDIA

The media loves a good headline. Hype gets people watching and those eyeballs attract advertising dollars. These days, the financial media is all about sensationalism and shooting firm whilst asking questions later on. They are anxious to report on Bernanke, Draghi, and anyone else who may move the markets. It seems like every week there’s a rumor or someone was “overheard” discussing a bailout, increasing stimulus measures or something of the like. The market follows suit accordingly and then calms down after realizing these reports are nothing more than pure speculative reporting. The media is certainly manic these days; when will they calm down and report just the facts?

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                DOWN

 

U.S. Equities:   DOWN

 

Int'l Equities:   UP   

 

Commodities: Flat

 

Fixed Income:  DOWN

 

Int'l Currencies: UP  

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

BRINKER INTL (EAT)

Remains our top long in casual dining as new sales layers (pizza) and strong-performing remodels (~5% comps) should maintain sales momentum. The company is continuing to enhance returns for shareholders through share buybacks . The stock trades at a discount to DIN (7.7x vs 9.3x EV/EBITDA) and in line with the group at 7.3x.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG            

 

PACCAR (PCAR)

Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

UNDER ARMOUR (UA)

This company’s on track to post $3Bn in revenues by ’14 – impressive given a $1.5Bn print in 2011. Perhaps more impressive is the breadth of growth drivers that will get it there – women’s, accessories, new underwear platform etc. in addition to footwear. UA is gaining share in both apparel and footwear quarter-to-date. While some may be concerned over the loss of UA’s SVP/Sourcing we’re 8% ahead of the Street in the upcoming quarter and buyers on weakness.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“Romney probably uses murray's pomade, his hair doesn't move..” -@ZorTrades

 

 

QUOTE OF THE DAY

“There is always a well-known solution to every human problem--neat, plausible, and wrong.” -H.L. Mencken

                       

 

STAT OF THE DAY

ECB holds main interest rate at 0.75%.


THE M3: SEPT GGR; THE PARISIAN; TOURIST NUMBERS; INDIA

The Macau Metro Monitor, October 4, 2012

 

 

MONTHLY GGR DSEC

Macau grossing gaming revenues in September rose 12.3% YoY to MOP 23.866 BN (HKD 23.17 BN, USD 2.99 BN).

 

PARISIAN CONSTRUCTION APPROVAL COULD TAKE A WHILE: GOV'T Macau Business

The Lands, Public Works and Transport Bureau says it could take a while to approve Parcel 3.  The bureau said it is still considering changes to the project’s design submitted by Sands China in June.  The bureau said that quite often the assessment of projects would require over one year, without referring directly to the Parisian.  LVS Chairman Sheldon Adelson said two weeks ago that he was hopeful work on The Parisian could start within 60 days, pending government approval.

TOURISTS FLOCK TO MACAU Macau Business

Over 1.24 million border crossings were recorded in the first four days of the eight-day long National Day Golden Week period.  The figure includes both residents and tourists.  According to the Macau Public Security Police, the border checkpoints recorded 408,784 inbound travelers from the mainland, Hong Kong and Taiwan during the first half of the Golden Week period.  Police authorities forecasted last week three million border crossings for the whole Golden Week period.

 

CASINO GIANT CAESARS ENTERTAINMENT PLANS TO OPEN HOTEL IN INDIA Economic Times

CZR plans to open up to 15 hotels in India in a decade and has already initiated talks with around half-a-dozen real estate developers.  Neera Chanani, South Asia head at CZR, said, "We have spent the last one year in exploring the Indian market.  We will look at big cities like Delhi, Mumbai, Bangalore, besides tapping locations like Goa and Tier-II markets." The firm is primarily scouting for management partnerships, but is also open to investing in properties.

 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – October 4, 2012


As we look at today’s set up for the S&P 500, the range is 18 points or -0.96% downside to 1437 and 0.76% upside to 1462. 

                                            

SECTOR AND GLOBAL PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 10/03 NYSE -2
    • Decrease versus the prior day’s trading of 196
  • VOLUME: on 10/03 NYSE 665.91
    • Increase versus prior day’s trading of 11.68%
  • VIX:  as of 10/03 was at 15.43
    • Decrease versus most recent day’s trading of -1.78%
    • Year-to-date decrease of -34.06%
  • SPX PUT/CALL RATIO: as of 10/03 closed at 2.55
    • Down from the day prior at 2.56

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning 26.63
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.63%
    • Increase from prior day’s trading of 1.61%
  • YIELD CURVE: as of this morning 1.40
    • Up from prior day’s trading at 1.38

MACRO DATA POINTS (Bloomberg Estimates)

  • 7am: Bank of England announces interest rates
  • 7:30am: Challenger Job Cuts Y/y, Sept. (prior -36.9%)
  • 7:45am: ECB announces interest rates
  • 8:30am: ECB’s Draghi holds news conference
  • 8am: RBC Consumer Outlook Index, Oct. (prior 50.4)
  • 8:30am: Jobless Claims, Sept. 29 est. 370k (prior 359k)
  • 9:45am: Bloomberg Consumer Comfort, Sept. 30 (-39.6)
  • 10am: Factory Orders, Aug. est. -5.9%  (prior 2.8%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural gas storage change
  • 11am: U.S. to announce plans for sale 3-yr, 10-yr, 30-yr debt
  • 11am: Fed to purchase $1.75b-$2.25b notes due 2/15/2036-8/15/2042
  • 2pm: Fed issues minutes of FOMC Meeting
  • 8pm: Fed’s Bullard speaks in Memphis, Tennessee, on economy

GOVERNMENT:

    • SEC member Daniel Gallagher, three officials from agency’s trading and markets unit speak at Sifma market structure conference in New York. 8:45am
    • Cheniere Energy, Royal Dutch Shell, GDF Suez join U.S. Energy Association at conference on global supply. 9am

WHAT TO WATCH:

  • Euro-area, England central banks to keep interest rates at record lows, economists say
  • U.S. same-store sales seen slowing in Sept. from August gains
  • Romney debate tactics may put campaign against Obama ’back on track’
  • U.S. shopping center demand slows as consumer spending stalls
  • U.S. consumer credit delinquencies near 6-yr low, bankers say
  • AT&T said to add first Nokia Windows 8 phone for US market
  • Unilever said to put Skippy peanut butter brand up for sale
  • Teva pulls depression drug generic after FDA says not same
  • Spain meets maximum target at bond auction as 3-yr yield rises
  • 3M scraps Avery label-unit deal as antitrust regulators balk
  • Applied Materials to cut 9% of workforce amid slump

EARNINGS:

    • International Speedway (ISCA) 7am, $0.08

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Oil Rises From Biggest Drop in Three Months on Syria Conflict
  • Overlander Leads Sucden to Metals-Trading Dominance
  • Morgan Stanley Backs Gold, Silver, Copper on Demand Outlook
  • Palm Oil Set to Drop After Rebound on Indonesia Tax, Mistry Says
  • Copper Gains in New York as Higher Equities Boost Demand Outlook
  • Soybeans Gain a Second Day as Price Drop May Boost Import Demand
  • Sugar Climbs to Seven-Week High on India’s Imports; Coffee Gains
  • Pan Pacific Said to Offer 15% Cut in Copper Premium for China
  • World Food Prices Jump to Six-Month High as Dairy Costs Rise
  • Iron-Ore Swaps Rise 1.4% in London Trading, Clarkson Data Show
  • Aluminum May Climb to $2,200 on Fibonacci: Technical Analysis
  • Bottom in Coking Coal Price Rests on Supply and Demand Response
  • Danube Decay Hinders Rhine Link to Leave Shippers Blue: Freight
  • Gold Jumps in New York on Signs of India’s Demand, Weaker Dollar

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

The Hedgeye Macro Team

 

 

 

 


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MAR BEATS BUT GUIDANCE IS WEAKISH

Should be good enough – for now.

 

 

We continue to think RevPAR growth will moderate, potentially more than expected by the Street.  We are not positive on Lodging stocks and would fade any boost from the MAR Q3 beat.  Here are our detailed thoughts.

 

 

Marriott 3Q12 Review

  • Bottom line:  Results in the Q were solid but not as good as the headline appears.  The big EBITDA beat was largely driven by much lower SG&A.  Operating income of $213MM was $23MM above the high end of MAR’s guidance.  SG&A was $23MM below company guidance.  The balance of the performance was aided by:
    • $2MM higher deferred fees on the Courtyard sale ($7MM actual fees; they guided $5MM)
    • $2MM higher incentive fees
    • $6MM better branding fees (we have very little visibility but we did suspect that they were sandbagging guidance on this line item)
    • Some of the above got offset on the bottom line by higher taxes and lower gains
  • 4Q Guidance is mostly in-line but a bit weaker:
    • RevPAR is weakish
    • SG&A lower than expected but in-line with their guidance
    • Owned, leased, corporate and other unchanged
    • EPS guidance of 55 cents vs prior implied guidance of 58 cents
  • General observations:
    • Total system-wide room count was lighter than we estimated by 0.6% or 3,600 rooms
      • Managed hotel rooms were down 0.8% YoY vs. our estimate of +0.1%; falling short of the our estimate by 2.4k rooms
      • Franchised hotel rooms grew 3.6% vs. our estimate of 3.9%; or 1k rooms below our estimate
  • Absolute RevPAR came in stronger than we estimated for almost every brand aside from Renaissance and Fairfield
  • Owned, leased, corporate housing and other revenue was weaker than we estimated but margins were better than our estimate and above company guidance of $20MM
    • Revenues were $29MM below our estimate and down 21% YoY.  $33MM of the shortfall vs. our estimate is likely due to the exclusion of the revenues from the Courtyard JV which the company did not disclose. 
    • Margins were not impacted by the revenue shortfall given that in the 3Q, margins in this category, excluding termination and branding fees, are typically negative.   This quarter, excluding termination and branding fees, margins for this bucket were a loss of $2MM.
    • The better than guided results in the category were driven by stronger branding fees of $27MM  and $1MM of termination fees in the quarter
  • Fee revenue came in $4MM above our estimate and on the lower of the company guidance of $315-325MM
    • Upside was driven by $2MM of higher deferred fees on the Courtyard JV and $2MM of higher incentive fees
    • Base fees as a % of room revenues were 4.7%, excluding the deferred fees, down 10bps YoY
  • SG&A came in $23MM below MAR’s guidance.  According to the release, there was a favorable litigation settlement in the quarter, offset by higher legal expenses, resulting in $5MM net benefit.  We’re not sure that higher legal expenses should be an offset unless they are one-time or unusual.   If we take the release at face value, then SG&A would have decreased 4% YoY, which is below recent trends: Adjusted SG&A increased 8% in 2011, 4% in 1Q12, and 6% in 2Q12.  Guidance for 4Q also implies at least a 4% YoY decrease in expenses
  • Tax expense was higher than we estimated at 35.6%



Earnings Slowing

This note was originally published at 8am on September 20, 2012 for Hedgeye subscribers.

“Betting taxpayer money on similar models seemed unacceptably risky.”

-Neil Barofsky

 

You can change the word taxpayer to investor, and you’d be making the same point. That’s what Barofsky said in Chapter 5 of Bailout, “Drinking the Wall Street Kool-Aid”, after listening to the New York Fed’s Bill Dudley attempt to explain his risk management process. Dudley is the economist who is now infamous for suggesting there is no real-world food/energy inflation because iPads are cheap.

 

Don’t blame all the ex-Goldman turned government guys (Paulson, Kashkari, Dudley, etc.) for making the biggest risk-adjusted US taxpayer commitments ever to bailout losing positions. Free-market capitalism is the best path to prosperity, baby! You don’t have to get the fundamentals right anymore. America 2.0 prosperity is all in the money-printing.

 

Setting aside the 10-13% March-June draw-down in US Equities, some may have had the stock market right “year-to-date.” But that’s not getting the economy right. The last time the economy started to diverge from the stock market like this was in Q3 of 2007. By then “the stock market was up double digits year-to-date”, then poof.   Earnings slowed, and cheap got a lot cheaper from there.

 

Back to the Global Macro Grind

 

Like iPads, I guess you can say stocks are “cheap”, but you better not be using the wrong numbers, or that’s where you’ll definitely get some multiple expansion! Cheap gets more expensive as companies guide down revenues and earnings. Ironically (see Chart of The Day), the most powerful side of the bull case in Q4 of 2011 (“earnings are great”) is now the biggest risk.

 

Here’s a snapshot preview of Q3 2012 Earnings Season:

  1. Fedex (FDX) = $27.3B market cap
  2. Staples (SPLS) = $8.3B market cap
  3. Intel (INTC) = $116B market cap
  4. Norfolk Southern (NSC) = $23.2B market cap
  5. Bed Bath & Beyond (BBBY) = $16B market cap
  6. Adobe (ADBE) = $16.3B market cap

The first 3 of those companies (FDX, SPLS, and INTC) already told you about #EarningsSlowing – they’ve been saying it for almost a month. The last 3 (NSC, BBBY, ADBE) just told you the same thing, but as of last night. Watch those stocks today.

 

Now maybe fundamentals “don’t matter” and, somehow, at the same time it’s all about stock picking again (always seems to be after the move) – but those maybes might only be maybes until the companies you are invested in report reality.

 

The storytelling in our profession is always impressive, but it will be really interesting to see who gets sucked into thesis drift (like they did at the Q3 top of 2007) as their “growth is back, earnings are great, and stocks are cheap” thesis of March 2012 comes unglued.

 

If it’s all about Apple and money printing, that’s a much more acceptable explanation – I get it. I had last week’s Viagra melt-up dead wrong inasmuch as being long the US Dollar and short Commodities this week looks dead right.

 

Apple is not the economy.

 

Apple is a great company that is not doing what companies explicitly linked to the global economy without a mega-innovation cycle are doing. FDX + SPLS + INTC + NSC + BBBY + ADBE = $207B in market cap exposed to #EarningsSlowing. AAPL has over 3x that market cap, and expectations are that their earnings may never slow again.

 

Put another way, Apple is not the economy but it is, increasingly, holding up the US stock market.

 

The other big thing going on all of a sudden this week is the other side of the Dollar Debauchery trade. Causality (Bernanke’s Policy to Inflate) has its short-term perks, but it also has its correlation risk.

 

To review:

  1. US Dollar Index was down for 6 consecutive weeks into and out of Bernanke’s to “infinity and beyond” move September 13th
  2. A 6wk draw-down of over 6% in the US Dollar Index took stocks and commodities to 6 week highs
  3. This is the first UP week the US Dollar has had in the last 7 (USD +0.9% week-to-date)
  4. Oil collapsed on that, down -8% in a straight line, breaking our long-term TAIL risk line of $111.44/barrel (Brent)
  5. The immediate-term TRADE correlation between USD and Gold = -0.97; that’s surreal
  6. Gold just failed to make a higher all-time high (versus the post January 25 Bernanke push to 2014 on 0% money in Feb)

So, what do you do with Growth and #EarningsSlowing, laced with a record level of correlation risk on the side this morning? I don’t know. All I can do is stay true to the research and risk management process that got me out of the way before the SP500 was down -4.4% when the music stopped in November of 2007.

 

My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Treasury Yield, and the SP500 are now $1753-1785, $107.46-111.44, $78.56-80.54, $1.29-1.31, 1.72-1.77%, and 1449-1474, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Earnings Slowing - Chart of the Day

 

Earnings Slowing - Virtual Portfolio



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